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Jayhawk Co. just paid a dividend of $2 per share. They anticipate growth of 18% over...

Jayhawk Co. just paid a dividend of $2 per share. They anticipate growth of 18% over the next two years, then 13% the following year and then taper off to 6% per year thereafter. How much is the dividend at time 1 (D1)? How much is the dividend at time 2 (D2)? How much is the dividend at time 3 (D3)?

If investors require 12% return on their investment in Jayhawk Co, what is the time-3 present value of all cash flows beginning at time 4 and going forward thereafter into the future?

If investors require 12% return on their investment in Jayhawk Co at what price should the stock sell today?

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Answer #1
Required rate= 12.00%
Year Previous year dividend Dividend growth rate Dividend current year Horizon value Total Value Discount factor Discounted value
1 2 18.00% 2.36 =D(1) 2.36 1.12 2.1071
2 2.36 18.00% 2.7848 = D(2) 2.7848 1.2544 2.22003
3 2.7848 13.00% 3.146824 = D(3) 55.594 = PV of future CF at T3 58.740824 1.404928 41.81056
Long term growth rate (given)= 6.00% Value of Stock = Sum of discounted value = 46.14
Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 3 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor
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